ROTH IRA –minor child as beneficiary

What are the rules when leaving a ROTH IRA to a minor child?

Terry Says:  Aha, you’ve touched on a tricky issue.  The advantage of leaving an IRA to a much younger beneficiary is that they can stretch out the growth of the IRA assets over their lifetime, taking only minimal distributions based on their life expectancy.  So a young child could stretch out those distributions over 75 years or more, leaving the principal to grow tax-deferred (or tax-free in the case of a ROTH IRA).

The only PROBLEM with that, is that most custodians (banks, brokerage firms, mutual fund companies) won’t open an IRA for a minor (assuming they have earned income), and won’t accept a minor as a beneficiary .  Others, including some of the best known firms, require that you designate a “custodian” (and a back-up custodian) before naming a minor as beneficiary.

There’s another problem.  You wisely see the benefits of letting the money grow over the years.  But at the age of majority (18 in some states, but by 21 in all states), the money belongs to the child, despite having named a custodian.  You were thinking Princeton; she is thinking Porsche!  There are certain trusts you can set up to be the IRA beneficiary for a minor, but be careful that the trust is drawn correctly.  Then you can designate how the money is spent and distributed on behalf of the child.

(You might be better off simply opening a 529 college savings account, if that is your goal.  You’ll get the same tax-free growth of the money for college expenses.)

So, you see it’s not so simple — although the aim is laudable.  You’re better off designating an adult as beneficiary of an IRA — any type of IRA, and making other arrangements for a minor –unless you’re in the midst of a comprehensive estate plan. And if you do name an adult child as beneficiary, please educate them about the benefits of continuing to let the money grow inside the account as long as possible vs. taking it out to pay their bills!